The Avoidance Factor: Research in Indonesia reveals unique behavioral obstacles to microinsurance take-up

In 2013, Indonesia’s Financial Service Authority (OJK) rolled out its Grand Design for Microinsurance. Since then, there have been initiatives to develop a regulatory framework for “micro” products in both the insurance and takaful industries, and many companies have now entered the mix.

According to the Grand Design, microinsurance simply signifies that these new risk management products are being designed especially for low income Indonesians with features that are easy to understand. Microinsurance should also be easy to obtain, affordable and quick to pay claims.

In 2014, I had the privilege of participating in the 1st Microtakaful Market Survey in Indonesia, funded by GIZ’s Program on Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia). RFPI Asia has the mission of promoting a pro-poor regulatory framework for insurance in Southeast Asia.

The survey was in partnership with the OJK and the Syariah (the Malay spelling of “Sharia”) Insurance Association of Indonesia, and it sought to explore both the demand and supply for microtakaful. In Indonesia, takaful is more commonly known as asuransi syariah (Islamic insurance), but in theory, takaful is different than insurance because risk is shared among takaful participants rather than transferred to the company that manages the takaful fund.

During the survey, I noticed some of the psychological aspects of risk management decision making among the interview and focus group discussion participants. As mentioned by Dalal & Morduch in their chapter of Volume II: A Microinsurance Compendium, behavioral economics has shown that when households make decisions about risk management, there are many under-the-surface issues that frame how their decisions are made. In this survey, one issue in particular stuck out: the “salience factor.” Salience refers to how prominent something is in our thoughts.

In the context of the survey, that something was insurance and takaful in the thoughts of the poor and lower middle classes in Indonesia. As emphasized by Dalal & Morduch: “The problem of salience is particularly important for insurance. Insurance is often bought for unexpected, unpleasant events that people prefer not to think about. If people make their expense allocations based on needs that are most salient, these unexpected events are the lowest on their list of priorities, even though they might have the largest impact on their well-being.” The authors go on to link saliency with a similar phenomenon called availability bias, which is “whether an event is easy to recall affects how people plan for it.”

So, how did we see the “salience factor” of microinsurance psychology come up during the takaful market survey? When asking Indonesians about insurance and takaful, several respondents mentioned that they were reticent about purchasing insurance or takaful because they were afraid they would forget to pay the premiums! This was especially true of yearly premiums because of the long length of time between payments.

One man in particular had previously forgotten to pay his educational insurance premium and lost all the money he had contributed. As a result, he wasn’t interested in joining another insurance scheme, but decided that saving was a better fit. I will be honest — when I first heard the notion in an interview that forgetting to pay an insurance premium or takaful contribution was a potential problem for low- and middle-income Indonesians, I was surprised. My surprise only increased when I heard this sentiment expressed on four different occasions during the survey. In other words, it seems like this “salience factor” is a real obstacle for some Indonesians when it comes to participating in takaful or insurance.

How might microinsurers in Indonesia overcome this obstacle of non-salience for their products? One simple way would be to promise every insurance client a text message or call within a week of their premium being due. Another strategy would be to follow up with every client with an overdue premium within a week, and offer a short grace period so that if it truly is a salience issue, the customer can continue his or her policy. This will hopefully lead to diminishing lapses as well and a more positive view of insurance among current and prospective clients.

Third, microinsurers can become more flexible and charge premiums based on the income patterns of their customers such as collecting premiums at harvest time for farmers, or at microfinance meetings with clients from partner financial institutions. In this way, not only does insurance become more salient, but will quite possibly better match the cash flows of the poor and present a better all-around microinsurance product.

Fourth, as already mentioned in many microinsurance case studies, if microtakaful and microinsurance schemes can make paying claims a public event and run towards paying claims as good PR, it will hopefully remind other clients about their own policies, making insurance more salient and altering their availability bias.

Lastly, as one of the respondents said in response to this problem, microinsurance companies might try offering prizes and bonuses for clients.